Thomas Dichter has written a provocative and contraversial essay, Hype and Hope: The Worrisome State of the Microcredit Movement, in which he claims that microcredit is not nearly as good a tool as it's made out to be, and that what the world's poorest most need are good governance, clearer laws, less corruption and more development. I'm not enough of an expert in the field to judge the validity of his sources, but a bunch of smart people I respect are buzzing about it (often, but not always, disagreeing vehemently with it), so I'd say it's worth a read:

The truth is that microcredit changes poor people's lives marginally. It is a stretch to go from the modest microcredit impacts that emerge from the little serious research we do have to suggesting as the UN's International Year of Microcredit website does, that road side sellers of a few bananas, used clothes, a few tea bags, or even 50 kilos of rice, are budding entrepreneurs standing at the threshold of participation in the wider economy, and who play a key role in wealth creation. Its just not so.

What would permanently help these poor people, and if not them, their children, are governments that get their acts together and provide structures, laws, and institutions under which people's evident interest in getting ahead in the world could be transformed into reality. Microcredit is not just a stopgap while we wait for that to happen. To the extent it is hyped as a genuine solution to poverty, it is a diversion.

Having managed a microcredit project or two in my own time "in the field", I can see what Dichter means.

The global reality is likely that while some microcredit is a disaster, some other microcredit is a brillant success. As with everything else in the world, there's no such thing as all or nothing.

1. The needs of poor people (if you carefully study them) are almost always needs that relate to state responsibilities: infrastructure, mobility, water, electricity, health care, schools, housing, an end to corruption, social protection, justice.
These basic conditions must get absolute priority, and they have to do with the State and with governance.
2. Moreover, there is ample proof for the fact that micro-credit never reaches the poorest of the poor, only the wealthy poor.
3. Finally, there's ample proof for the fact that micro-credit often makes people poorer, as it shifts fine social and monetary balances within the household and between the s*xes. There are countless cases in which lenders just put their children more to work so they can pay back the loan (despite the rosey stories out there).

Micro-credit surely will have some successes amongst the wealthy poor and amongst those who don't really need it. But the myth that it improves the lives of people must be broken.

Micro-credit also creates a climate which makes it possible for the State to no longer take up its responsibilities. After all, micro-credit is the monetization and privatisation of a social group which benefits least from privatisation and most from the State.

Anyone who understands the basic economics of State householding knows that State money is supposed to go down the social ladder, while micro-credit blocks off this way and sends it back up.

Micro-credit is probably one of those typical development instruments of which we will later say that it has caused a lot of damage to a great number of people.

Posted by: Lorenzo on 16 Apr 06

Lorenzo, I respect your view, but I want to challenge it. Why should a large, monolithic State have responsibility for things that people might do better in smaller groups? There's a proper scale to any enterprise. A State is only one scale. Many endeavors are more nimble, quicker to adapt to new conditions, more in touch with unique local conditions, when they're small and local. They can enhance, rather than diminish, large-scale State endeavors.

I think this is a straw man argument. It claims that microcredit somehow prevents or obviates State responsibility to perform its duties well. How it does this is not explained. But look at it this way: in places of rampant corruption and inefficiency, microcredit still manages to improve people's lives significantly. Imagine what in could do in partnership with competent governments.

I don't think it's so much a matter of "scale", but more of "process". The State is everywhere and can get into the smallest village, so that's not the point, I think. The State is not monolithic, that's a myth coming from disastrous WorldBankers and from the IMF crowd.
The point I'm trying to make is different, though: the State is essentially a redistributive machine which levies progressive taxes to distribute them to the bottom. That's truly essential in any modern society. Micro-credit creates a climate which turns this model upside down. Micro-credit is the WorldBank and the IMF's disastrous and hellish policies but then on a tiny local scale: privatise everything, and get rid of the State. Micro-credit privatises the one social sphere that should receive the social justice embedded in the State's redistributive mechanisms and responsibilities.

But since we're talking about scale anyways: how does micro-credit build roads, schools, health care facilities and houses? It doesn't.

Finally, the "scale" on which micro-credit operates is treacherous: it makes it look as if tiny amounts of money work with the same leverage as larger capital does. This is obviously false. When you're living in an environment deprived of basic infrastructure, schools, housing, safety, and electricity, the leveraging power of that money becomes even less strong.

In short, micro-credit gets the priorities all wrong. It doesn't work when there's no environment in which it could work. That's one of the reasons why only those who don't need it (the wealthy poor) and those who already operate in spaces that have basic conditions fulfilled, see the benefits of it. The rest is being fooled and treated in an obscene manner.

First things first, please. And in this case, it's the State and its obligation to build an environment in which lending and capital work.

Posted by: Lorenzo on 16 Apr 06

What about Dichter's assertion that the most promising entrepreneurs are often left out simply because they are not poor enough? It's interesting because no matter how much private sector-led development occurs, there will always be a need for the State, as Lorenzo points out, to help the poorest and provide public goods. On the other hand, entrepreneurship is more adaptable and appropriate for local-level projects, as David notes a welcome respite from the "monolith."

So why do most MFIs insist on helping only the poorest of the poor? Maybe Dichter's half right - microfinance isn't working to the best of its ability, but it isn't totally broken. Rather, microfinance ought to focus on the gap between ultra small loans and commercial finance, the so-called "mesofinance gap." When a true entrepreneur needs to scale up a good idea, that's the kind of money he needs - not $100 or even $1000, but somewhere between $5000 and $500,000, a level currently underserved by both micro and commercial finance.

First a thought about wording. Could we refer to people's economic status as "destitute" and "poor"? It seems more accurate and descriptive.

The article doesn't seem terribly balanced. Around 10 years ago some intellectuals in development circles were cautioning that the World Bank borrowing the rhetoric of the Grameen Bank could spell disaster for the poor. Micro-credit doesn't replace the state and it can lead to more poverty - no solution is perfect, there is no panacea.

There is nothing wrong with a lot of survival activity. A lot of widowed women will sell fish, vegetables or clothes at the market. If some access to cash can help their lives -- and because we are talking of very small amounts here, it seems like a no-brainer.

Taking care of these people may be the responsibility of the state in some ideological systems. Some of us are deeply skeptical of the ability of corrupt regimes to care for these folks. If a movement grows sufficiently to challenge the state's legitimacy through deeds- can you think of a more effective way to get the state to handle its responsibilities?

Work also needs to be done on so-called "meso-finance". Would it have been as easy to identify if there wasn't a lot of micro-credit work being done? Won't some of the micro-finance organizations be likely candidates to fill that need? If the answer to either question was yes, then micro-finance was a huge net win.

There are good reasons to attack the excesses of micro-finance. We shouldn't paint it all with the same brush, but keep steering the movement to continue progress. Most of all, we can use micro-credit and such initiatives as Posted by: Daniel Haran on 17 Apr 06

Lorenzo, I agree with most of what you say. But I have trouble equating microcredit with the excesses of the World Bank or global capitalism. If I understand you correctly, you believe that enthusiasm for microcredit equals harmful enthusiasm for liberal market economics and disdain for the state. I don't think that has to be the case. Even when there is a healthy, functioning state, it can benefit from partnerships with small-scale, on-the-ground organizations. Examples abound: police work and public safety benefit from neighborhood-watch groups; fisheries policies benefit from partnerships with fishermen; public health efforts rely on people who will go door-to-door. I think you're right that microcredit can't substitute for a functional state - I can't imagine it doing much good in Somalia, for example - but it can be an effective way to deliver an essential service to people who otherwise are usually marginalized.

The comments about "wealthy poor" seem very accurate, especially in the U.S. version of microcredit. I used to work for a micro-lender in Texas. Most of our money came from loans, so in giving loans we still had to have a pretty tight credit policy. We were just a bit more forgiving, and willing to talk to startups, than the banks. In the end, it struck me that the succesful clients were those who just needed a bit of extra help to push them up over the edge and safely on the road to "middle class." Our work did help some of the truly poor and those who weren't yet close to the brink of making it -- but only when combined with intensive training and business counseling.

This is an interesting thread of conversations. My name is Richie Norton, Im the Founder & President of Working World, Inc.  a company that would fit the above-described meso-finance category striving to end poverty in developing countries. We call this niche micro-venture financing.

I read Professor Thomas Dichters article Hype and Hope: The Worrisome State of the Microcredit Movement and I think the segment from the article that started this thread is misleading of Dichters true opinion.

I dont think Dichter is saying microfinance is ineffective in ending poverty: how could he when Grameen Bank (located in Bangladeshthe #1-rated most corrupt country in the world for the past five years) reports in March 2006 that they have worked with 5.89 million borrowers and that 58% of them have successfully crossed the poverty line? (www.grameen.com)

I think Dichters real view is expressed in his closing lines: To move forward the best operators of microcredit need to become banks, move more seriously into savings mobilization, and learn to deal with banking policy and other (institutional) aspects of the enabling environment. And they need to come to terms with the constraints imposed by political correctness - by being unafraid of lending to real businesses, and unafraid of abandoning the subsistence activities in the informal sector.

In the sense that microfinance institutions (MFIs) need to move forward by commercializing and ridding themselves of subsidies Dichter makes an educated point. Unfortunately, his article fails to mention that commercialization and unsubsidized lending is the direction the microfinance industry is already taking. Additionally, the article fails to mention that governments all around the world are implementing microfinance and are leveraging efforts by working with existing MFIs.

Sticking with the Grameen Bank example, Grameen has been able to take microfinance to the next level by filling the need to reach both beggars (the poorest) and micro-enterprises (the wealthy-poor) while still working with the poor that fit somewhere in the middle. Here are some of the programs Grameen (and many other MFIs) are implementing: pension funds (encouraging saving), life insurance, micro-enterprise loans (with no maximum amount to borrow), housing loans for the poor.

I recently wrote a book review for the Journal of Microfinance on The Private Sector in Development: Entrepreneurship, Regulation, and Competitive Disciplines by Michael Klien and Bita Hadjimichael, published by the World Bank.

The authors contend that the private sectors role in the development agenda is to complement the public sector to meet the needs of povertys many dimensions. Regarding microfinance, Klein and Hadjimichael write: The effect of microfinancing is likely to be greater when sensible, market-friendly reforms create a good business environment (p.84). So, Dichter does make a good point that complements Klein and Hadjimichael: a more permanent solution to poverty is to work with governments to create policies, laws, structures, procedures and institutions that result in a better business environment. However, to wait for governments to perform in this way is a mistake: What would life be like today for those 5.89 million people in corrupt Bangladesh if it werent for Muhammad Yunas and the Grameen Bank?

Lets not think of microfinance as being limited to only reaching a certain segment of people with only one service to provide.

What other organizations are out there effectively working with literally millions of destitute people on a daily/weekly basis giving them a chance to use their own talents and skills to become financially self-reliant? What other products and services can now be provided to the poor today because of MFIs close contact with the poor? Mircofinance IS NOT a dead-end; its alive and well, and a pathway toward financial self-reliance and thus life betterment for millions of impoverished individuals, families and communities the world over.

Microfinance is a solution to ending poverty: not a diversion as Dichter puts it. Microfinance enables individuals to move themselves from micro-finance to larger financing needs like home ownership, insurance, formal banking and eventually entering the middle-class.

A brief comment on the above post regarding crossing the poverty line and the role of microcredit. Grameen Bank is an impressive institution, but it's important to recall that all organizaitons at some level are trying to impress. When Grameen claims that 58% of 5.89 milliion borrowers crossed the poverty line we need to note the following: First we are told that this is the finding of an "internal survey;" we are not told how it was conducted, nor how the poverty line was defined. We are told that 58% of borrowers' families crossed the poverty line, which could suggest that, if they did so, there might be other reasons besides microcredit. For example, many people in poor countries receive remittance transfers from family members working abroad. The total of these transfers is now almost double the total amount of development aid provided by the OECD countries. Bangladesh is a major labor exporter and it is quite likely many poor are being helped by these transfers.

The question also needs to be raised of whether these people crossed the poverty line permanentaly or not. Will they stay on the other side of the line? We don't know yet. I'd be more convinced if Grameen had had this survey done by an external agency, had explained how it was conducted, and had waited 5 to 10 years to tell us how long people had been on the good side of the poverty line.

Finally, Grameen has been around for 30 years. There are close to 150,000,000 people in Bangladesh, of which roughly half are below the poverty line. Even if true that 3.4 million (58% of 5.89) of Grameen's borrowers crossed the poverty line, we are still looking at single digit percentage of the total number of poor. Would making microcredit available to every single poor person in Bangladesh move them all over the line? I doubt it.

I am indeed saying that microfinance appears to be ineffective in ending poverty. In the absence of fertile economic ground, fair trade, enabling institutions (including educational and health institutions), and a whole host of other complex changes, microfinance, and especially microcredit is basically a bandaid.

The late British economist P.T. Bauer, a life long critic of foreign aid aimed at development, said "To have capital is the result of economic achievement, not its precondition."